More than 1.2 million people filed for bankruptcy in 2000, an increase of
nearly 70 percent from 1990. With the recent economic downturn, the number of
bankruptcy filings is expected to grow. The proposed Bankruptcy Reform Act of
2001 modifies the Bankruptcy Code and is intended, among other things, to make
it more difficult for individuals to erase unsecured debts under Chapter 7.
It is also intended to increase the number of Chapter 13 filings, requiring
individuals to repay at least some of their debt. The Act also contains provisions
applicable to small business Chapter 11 reorganizations.
On March 1, 2001, the House of Representatives passed H.R. 333, its version
of the Act, while, on March 15, 2001, the Senate voted to pass its version,
S.420. The versions are slightly different. President George W. Bush has indicated
that he will sign the Act, which would take full effect 180 days thereafter.
This article focuses on those provisions of the Act that may be of interest
to a surety in connection with its principal's or indemnitor's bankruptcy filing.
Credit Counseling for Individual Debtors
Within 6 months prior to a bankruptcy filing, an individual must receive
debt counseling from an approved nonprofit credit counseling agency. Counseling
must include outlining opportunities for available credit counseling, assistance
in the preparation of a budget analysis, and, to the extent possible, preparation
of a debt repayment plan. The U.S. Trustee is responsible for approving a list
of the nonprofit credit counseling agencies. An individual debtor is required
to file a certificate from the credit counseling agency describing the counseling
received and a copy of the debt repayment plan, if any. The court will deny
an individual Chapter 7 and 13 discharge if the debtor does not complete, post-petition,
an instructional course concerning personal financial management.
Bankruptcy Code Section 521(a)(1) Certifications/Disclosures. The Act provides that all debtors shall file a certificate from legal counsel,
a bankruptcy petition preparer, or his or her own certification stating that
the debtor was (1) provided a description of Chapters 7, 11, 12, and 13 and
the general purpose, benefits, and costs of proceeding under each chapters,
(2) advised of the credit counseling agency services, (3) provided notice that
a person who knowingly and fraudulently conceals assets or makes a false statement
in connection with a bankruptcy case shall be subject to fine and/or imprisonment,
and (4) given notice that the information the debtor supplies in a bankruptcy
case is subject to the Attorney General's examination.
The Act also provides that a debtor must file copies of all payment advices
or other evidence of payment that the debtor has received from any employer
in the 60 days preceding the bankruptcy filing, as well as a statement of monthly
If an individual debtor, under Chapter 7 or 13, fails to file all of the
required certifications and disclosures, in addition to the already required
list of creditors, schedule of assets and liabilities, schedule of current income
and expenditures, and statement of debtor's financial affairs, within 45 days
from the petition date, the court shall automatically dismiss the case effective
the 46th day after the petition unless the court grants an extension for not
longer than 45 days. Any party in interest may request this dismissal, which
the court shall enter within 5 days thereafter.
Other Bankruptcy Code Section 521 Disclosures. The court will dismiss a case if, not later than 7 days prior to the first meeting
of creditors, the debtor has not provided a tax return for the latest taxable
period prior to the bankruptcy filing, unless circumstances beyond the debtor's
control prevented the filing. The court, U.S. Trustee, or party in interest
can require individual debtors in a Chapter 7, 11, or 13 case to file federal
tax returns during the bankruptcy proceeding. The U.S. Court's Administrative
Office Director is to establish procedures for safeguarding the confidentiality
of the tax information.
In a Chapter 13 filing, the debtor must disclose its income and expenditures
in the preceding tax year and during the bankruptcy proceeding, including the
amount and sources of income and the amount and identity of any person contributing
to the debtor's household.
Small Business Debtors
What Is a "Small Business Debtor?" A "small business debtor" is a person
engaged in commercial or business activities (excepting those involved with
real property ownership/operation) having aggregate noncontingent, liquidated
secured and unsecured debts of not more than $3 million. A small business debtor
does not include a member, such as a subsidiary, of a group of affiliated debtors
whose aggregate noncontingent liquidated secured and unsecured debts exceed
Reporting Requirements of the Small Business Debtor
Small business debtors must file periodic post-petition reports setting forth
its (1) profitability, (2) projected cash receipts and disbursements, (3) comparisons
of actual cash receipts and disbursements, (4) compliance with post-petition
requirements, (5) tax returns and payment of taxes and other administrative
claims, and (6) "other matters that are in the best interests of the debtor
A Chapter 11 small business debtor must also include its balance sheets,
statements of operations, cash-flow statements, and federal income tax returns,
and, upon reasonable notice, must allow the U.S. Trustee access to its business
premises and books and records.
Bankruptcy Automatic Stay Provisions. The Bankruptcy
Code automatic stay provisions do not apply to Chapter 11 small business debtors
where that debtor previously filed a Chapter 11 bankruptcy that (1) was dismissed,
or (2) had a plan confirmed, within 2 years from the subsequent petition date.
There are exceptions to this provision, including an involuntary case or where
a voluntary petition was the result of unforeseen conditions and it is likely
that the court will promptly confirm a plan.
Chapter 11 Disclosure Statement and Plan; Confirmation. A Chapter 11 small business debtor must file a plan and any necessary disclosure
statement no later than 300 days after the petition, with exclusivity only running
180 days after the petition. These time requirements may be extended if the
court will confirm a plan within a reasonable time. The time for confirming
the Chapter 11 plan is 45 days from filing, although it is possible to obtain
Chapter 7 Provisions
Determination Re Dismissal/Conversion. Within
10 days following the first meeting of creditors, the U.S. Trustee must file
a statement as to whether the debtor's case constitutes an abuse of discretion.
The U.S. Trustee will make the determination through a formal process of means
testing of assets, debts, and average monthly income. The means test generally
establishes a formula for determining how much will be available to repay debt
after certain allowable expenses are deducted. Under the formula, remaining
income of more than $10,000 over 5 years (or $166.67 per month) would result,
in most instances, in a dismissal of a Chapter 7 filing. The debtor would thereafter
need to choose between Chapter 13 or forego bankruptcy protection.
In the event that the U.S. Trustee determines that a particular case is an
abuse of discretion, the U.S. Trustee must file a motion to dismiss or convert
the proceeding or, alternatively, set forth the reasons such a motion would
not be appropriate, such reasons being articulated in the Act.
During the course of the bankruptcy proceeding and after notice and a hearing,
the court, on its own motion or pursuant to the trustee's or any party in interest's,
may dismiss an individual's Chapter 7 proceeding or, with the debtor's consent,
convert the case to Chapter 11 or 13. In making that determination, the Act
provides a formula, similar to the threshold formula, for determining a debtor's
ability to repay his or her debts. The court may also consider whether (1) the
debtor filed the petition in bad faith, or (2) the totality of the circumstances
of the debtor's financial situation.
Chapter 11 Provisions
Conversion or Dismissal. The court may convert
or dismiss a Chapter 11 proceeding, upon a showing of cause. Cause has been
modified to include:
- Substantial or continuing loss to or diminution of the estate
- Gross mismanagement of the estate
- Failure to maintain appropriate insurance
- Unauthorized use of cash collateral
- Failure to comply with a court order
- Repeated failure to satisfy any filing or reporting requirement
- Failure to attend the section 341(a) meeting of creditors or a Bankruptcy
Rule 2004 examination
- Failure to provide information to or attend meetings with the U.S. Trustee
- Failure to pay taxes or file tax returns after the order for relief
- Failure to file a disclosure statement or file or confirm a plan
- Failure to pay required fees or charges
- Revocation of an order of confirmation
- Inability to effectuate substantial consummation of a confirmed plan
- Material default of a confirmed plan
- Termination of a confirmed plan by reason of the occurrence of a condition
specified in the plan
- Failure of the debtor to pay any domestic support obligation that first
becomes payable after the date on which the petition is filed
Unless the movant consents or the court orders otherwise, the court shall
hear a motion to dismiss or convert not later than 30 days after filing and
issue a decision not later than 15 days thereafter.
Chapter 13 Provisions
Chapter 13 Plan Periods. The plan period of
a Chapter 13 debtor, whose current annual income (factoring in the income of
the debtor's spouse) is equal to or greater than the median family income of
an applicable household as reported by the Bureau of the Census, cannot exceed
5 years. A Chapter 13 debtor whose current annual income is less than the median
income may not provide for payment over a period longer than 3 years unless
the court, for cause, grants a longer period, not to exceed 5 years.
Timing of Plan Confirmation. A plan confirmation
hearing must occur not earlier than 20 days and not later than 45 days after
the first meeting of creditors setting. Nonetheless, a debtor shall commence
making payments pursuant to the proposed plan to the trustee not later than
30 days after the plan is filed or the order of relief, whichever is earlier.
The trustee will hold the payments until confirmation or denial of the plan.
If confirmed, the trustee shall distribute the payments in accordance with the
plan. If the plan is not confirmed, the trustee shall return to the debtor any
funds received for claims not yet due.
Chapter 13 Discharge. Under the Senate version,
a Chapter 13 debtor may not be discharged of debts if the debtor had received
a discharge in a case under (1) either Chapter 7, 11, or 12 during the 3-year
period preceding the date of the pending Chapter 13 petition, or (2) Chapter
13 during the 2-year period preceding the date of the pending Chapter 13 petition.
Under the House version, a Chapter 13 debtor may not be discharged if the debtor
received a discharge in any bankruptcy case within 5 years before the Chapter
State Homestead Exemptions. Under the Senate
version, a debtor selecting state exemptions may not exempt the debtor's equity
in real property that the debtor, or a dependent of the debtor, uses as a residence
that exceeds $125,000. Under the House version, a debtor may not exempt under
state law the debtor's equity in real property that the debtor, or a dependent
of the debtor, uses as a residence and that the debtor acquired during the 2-year
period preceding the bankruptcy filing that exceeds $100,000. This limitation
does not apply to any interest transferred from a debtor's previous residence
acquired prior to the 2-year period into the current residence, where the debtor's
previous and current residence are located in the same state.